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Categorization of Supply Chain Risk and Risk Management

Submitted by Daniel Dumke on Mon, 2011-05-16 16:13

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Several questions I receive concern the very basic elements of supply chain risk management. Since reading “Categorization of Supply Chain Risk and Risk Management” by Norrman and Lindroth (2004) I often referred to it, to describe the different aspects.

Since SCRM is dealing with more than the risk from a single company it takes a broader perspective than the traditional risk management approach. It also considers the rippling effects of events connected entities.

There are several definitions for risk. The Royal Society defined it in 1992 as:

risk is the chance, in quantitative terms, of a defined hazard occurring. It therefore combines a probabilistic measure of the occurrence of the primary event(s) with a measure of the consequences of that/those event(s)

An important dimension of risk is its contextual association, which can be strategic, financial, operational, commercial or technical:

Risk Management Process

After highlighting some basic aspects of SCRM and risks in the supply chain context, the authors present their risk management process, which contains three elements: Risk Analysis and Assessment, Risk Management and Business Continuity Management (BCM).

The process starts with a listing of the risks affecting the supply chain using Fault Tree Analysis (FTA) and assessing the effects of those events in case they happen on the supply chain using Event Tree Analysis (ETA). As the second step, the decision has to be made if the risk can be accepted or if the risks can be mitigated by reducing the likelihood or impact.

Thirdly, one can argue if BCM (see figure 3) has to be part of a risk management process, nonetheless it is related, since it covers the aspect of planning for when an adverse event happens.

Figure 3: Business Continuity Management (Norrman and Lindroth, 2004)

Conclusion

The framework combines several important aspects of risk management in general and specifically supply chain management. It is therefore very suitable for an introductory purpose on supply chain risk management.